Test 2-Chapter 7: Bond Markets Flashcards
Capital markets have securities that are _____ term.
long term, a year or more
Capital markets not only include debt, but ____ as well.
equity
Which Capital market instrument does this describe?
“ no default risk, active secondary market, very liquid, can be bought and sold 24/7, globally and domestically traded, and rate is set by the market”
Treasury Bonds
Which Capital market instrument does this describe?
US government issued, 2,3,5,7 and 10 year maturities, the ten year rate is considered a benchmark”
Treasury Notes
Which Capital Market instrument does this describe? Us gov't issued began in 1996 lower coupon than comparable treasuries 5, 10, and 30 year maturity
Inflation-indexed treasuries (TIPS)
How do inflation-indexed treasuries or TIPS work, in regards to the interest rate and inflation?
the interest rate goes up or down with inflation
If inflation is really high, is it a good time to buy TIPS?
no
Who issues municipal bonds?
local and state governments
Are municipal bonds credit rated?
yes
Which is more riskier a t-bond or municipal bond?
municipal bond
Which is more liquid a t-bond or municipal bond?
municipal bond
What is the nice feature about municipal bonds?
tax deductible interest
What are the two types of municipal bonds?
revenue and general obligation
Which type of municipal bond is safe and why?
general obligation because they can always just raise taxes, because general obligation bonds are backed by taxes
Why are revenue bonds more unsafe?
because they’re backed by project revenue and not every project generates enough revenue
Who sells municipal bonds?
banks
Is there any active secondary market for muni bonds?
not really
How do most investors get into municipal bonds?
mutual funds
What capital market instrument?
long-term company debt
10-30 years
call and convertibility features
corporate bonds
Why would companies put a convertibility feature on their bonds?
gives investors incentive to buy their bonds
A debenture is an ________ bond.
unsecured
What does a debenture bond mean?
bond isn’t backed by a fixed asset
What items qualify as collateral
real estate, bonds, and stock
What does this describe?
contract, lays out all the details, legal contract filed with government, gives all the details (convertible, call, coupon, interest and how often it will be paid)
bond indenture
the prices on corporate bonds are driven by maturity, rating, the market, and ______
liquidity
In regards to corporate bonds, the long the maturity, the ____ risky, because buyers want more interest if they are tying their money up for long time.
more
Not all bonds are super liquid therefore the less liquid, and the _____ interest demanded
interest
Is there an active secondary market for corporate bonds?
yes
Bonds must be rated what or higher to be considered investment grade?
BBB or Baa
Microsoft, J&J, and Exxon are the only firms in S&P 500 with what?
AAA rating
What are junk bonds?
bonds rated below investment grade
50% of corporate bonds are rated _____
junk
Do treasuries have any default risk?
no
what kind of risk does this describe?
asset/security that cannot be traded quickly enough to prevent a loss
liquidity risk
Are corporate bonds riskier than muni bonds?
no, can’t assign a specific risk because both have default risk
How can muni bonds offer lower yields than treasuries?
because munis are subsidized by the government and the interest is backed
Do most bonds offer collateral?
no most are debenture bonds or unsecured
What makes a bond junk
Below BBB
What happens to the value of the bond when interest rates rise?
value of bond decreases
